Tax compliance statistics describe both the amount of tax that should be paid and the amount that is not paid on time. IRS projections put the gross federal tax gap at $696 billion for tax year 2022, while the projected voluntary compliance rate was 85.0%. Small-business reporting is an important part of that picture, but the available estimates cover different periods and should not be treated as interchangeable.
Contents
- Federal tax compliance and the tax gap
- Nonfiling, underreporting, and underpayment
- Sole proprietors and Schedule C reporting
- Information reporting and compliance
- Partnerships and pass-through businesses
- IRS examination coverage and measurement
Federal tax compliance and the tax gap
The federal tax gap is the difference between the tax that should be paid and the tax that is paid on time. The IRS’s Tax Gap Projections for Tax Year 2022 reports both estimated true federal tax and the projected gross gap. The earlier 2014–2016 figures are annual averages; later figures are projections for individual tax years.
| Period | Estimated true federal tax | Gross tax gap | Voluntary compliance rate |
|---|---|---|---|
| 2014–2016 annual average | $3.307 trillion | $496 billion | 85.0% |
| 2017–2019 annual average projection | $3.644 trillion | $549 billion | Not supplied |
| 2020 projection | $3.883 trillion | $581 billion | Not supplied |
| 2021 projection | $4.673 trillion | $708 billion | Not supplied |
| 2022 projection | $4.635 trillion | $696 billion | 85.0% |
Source: Tax Gap Projections for Tax Year 2022, IRS. The 2017–2019, 2020, 2021, and 2022 amounts are projections rather than completed historical measurements.
The projected gap was $696 billion in 2022 against estimated true federal tax of $4.635 trillion. The same IRS source gives a projected voluntary compliance rate of 85.0% for 2022. That rate is a broad national estimate; it does not mean that every type of income, taxpayer, or business has the same compliance level.
Nonfiling, underreporting, and underpayment
The gross tax gap has several components. Nonfiling is tax that is not paid because a required return is not filed. Underreporting is tax associated with income, deductions, credits, or other amounts reported incorrectly. Underpayment is tax reported as owed but not paid on time.
For the 2014–2016 annual average, the IRS estimated a $39 billion nonfiling gap and a $398 billion underreporting gap. For tax year 2022, the projected nonfiling gap was $63 billion, equal to 9% of the gross gap. The projected underreporting gap was $539 billion, equal to 77% of the gross gap. The projected underpayment gap was $94 billion, equal to 14% of the gross gap.
The IRS projected a $41 billion nonfiling gap for 2020 and a $57 billion nonfiling gap for 2021. For underreporting, the projections were $480 billion in 2020, or 83% of that year’s gross gap, and $554 billion in 2021, or 78% of the gross gap. These percentages are tied to their stated tax years and projections.
Individual income tax accounted for much of the 2022 underpayment projection: the projected individual-income-tax underpayment gap was $80 billion, or 12% of the gross gap. These component estimates help distinguish a missed return from a return that was filed but contained incorrect income or expense information.
Source: Tax Gap Projections for Tax Year 2022, IRS.
Sole proprietors and Schedule C reporting
Sole proprietors report business activity on their individual tax returns, commonly through Schedule C. The Government Accountability Office reported in 2024 that the IRS attributed approximately $80 billion in annual unpaid taxes to sole proprietors underreporting income. That amount was described as 16% of the estimated annual $496 billion tax gap, using the 2014–2016 tax-gap estimate as its reference point.
The same GAO report states that about 27.8 million sole proprietors filed tax returns in tax year 2019. Sole proprietors represented about 18% of all individual taxpayers in 2019. These figures show the scale of the population involved, but they do not establish a current error rate for every sole proprietor.
An older GAO analysis of tax year 2001 provides detailed Schedule C estimates. It estimated that 70% of Schedule C filers made an error when reporting net business income, representing about 12.9 million filers. The analysis estimated that 61% underreported net business income and 9% overreported it. Detected Schedule C reporting errors totaled an estimated $93.6 billion of misreported net business income before adjustment.
The 2001 analysis also estimated that 39% of sole proprietors underreported gross income on Schedule C, or about 6.9 million filers. Gross-income underreporting totaled about $53 billion net of offsetting overstatements. Expense reporting showed a similarly broad error pattern: 73% of sole proprietors made an error on total Schedule C expenses, or about 10.9 million filers. Four categories—car and truck, depreciation, supplies, and other expenses—accounted for 55% of expense misreporting in that analysis.
After adjustment, the IRS estimated that sole proprietors misreported 57% of net business income in tax year 2001. The estimated sole-proprietor net-business-income tax gap for that year was $68 billion.
The 2001 figures are legacy estimates and should be read as historical measurements, not as independently verified current statistics. Sources: Sole Proprietor Compliance: Treasury and IRS Have Opportunities to Reduce the Tax Gap, GAO; and GAO-07-1014, Tax Gap: A Strategy for Reducing the Gap Should Include Options for Addressing Sole Proprietor Noncompliance, GAO.
Information reporting and compliance
Information reporting and withholding are associated with substantially different estimated reporting accuracy. For tax years 2014–2016, the IRS estimated misreporting of wages subject to substantial information reporting and withholding at 1% of income. For income subject to substantial information reporting but not withholding, the estimated misreporting rate was 6%.
For income subject to little or no information reporting, the estimated misreporting rate was 55% for the same 2014–2016 annual-average period. These figures describe income categories and should not be read as a compliance rate for a particular occupation or business structure.
The IRS estimated that individual income taxes were underreported by $278 billion for tax years 2014–2016. That represented 17% of the amount that should have been reported. Self-employment taxes were underreported by an estimated $53 billion, or 50% of the amount that should have been reported, during the same period.
| Income or tax measure | Period | Estimated misreporting or underreporting |
|---|---|---|
| Wages with substantial information reporting and withholding | 2014–2016 annual average | 1% of income misreported |
| Income with substantial information reporting, without withholding | 2014–2016 annual average | 6% of income misreported |
| Income with little or no information reporting | 2014–2016 annual average | 55% of income misreported |
| Individual income taxes | 2014–2016 annual average | $278 billion, or 17% |
| Self-employment taxes | 2014–2016 annual average | $53 billion, or 50% |
Source: Tax Gap Estimates for Tax Years 2014–2016, IRS.
Partnerships and pass-through businesses
Partnership statistics provide context for the size and variety of pass-through business activity. For tax year 2023, partnerships filed over 4.5 million returns and those returns represented more than 30.2 million partners. The number of partnership returns increased 1.7% from tax year 2022 to 2023, while the number of partners increased 5.0%.
Limited liability companies made up 72.7% of partnerships in tax year 2023. Limited partnerships represented 9.7%. Real estate and rental and leasing accounted for 50.7% of partnerships. These are shares of the partnership population reported for 2023; they are not estimates of noncompliance or of the tax gap for each business type.
Source: Partnership Returns, Tax Year 2023, IRS Statistics of Income.
IRS examination coverage and measurement
Tax compliance statistics depend on both taxpayer reporting and the government’s ability to measure and examine returns. IRS data show that the agency received 230.4 million returns and employed 13,879 revenue agents in fiscal year 2010. In fiscal year 2019, it received 253.0 million returns and employed 8,526 revenue agents.
| Fiscal year | Returns received | Revenue agents |
|---|---|---|
| 2010 | 230.4 million | 13,879 |
| 2019 | 253.0 million | 8,526 |
Source: SOI tax stats—Examination coverage and recommended additional tax after examination, IRS Data Book, Table 3-1.
Separately, the IRS says it processes about 200 million tax returns each year. Its Statistics of Income program uses about 500,000 returns for its statistics each year. Those annual estimates describe operational scale and statistical work; they are not the same measure as examination coverage.
Source: SOI Tax Stats—The work SOI does, IRS.
For small businesses, the figures point to several distinct compliance questions: whether a return is filed, whether business income and expenses are reported accurately, whether information reporting supports the amounts claimed, and whether tax shown as due is paid. The measurement period matters throughout: the broad federal projections center on 2014–2016 and projected 2020–2022 amounts, the detailed Schedule C study concerns tax year 2001, sole-proprietor population figures concern 2019, partnership figures concern 2023, and IRS staffing comparisons concern fiscal years 2010 and 2019.